Beijing's "white list" poses make-or-break test for shipbuilders

TORU SUGAWARA, Nikkei staff writer

With survival at stake, New Century Shipbuilding is scrambling for orders.

JINGJIANG, China -- It is lunchtime, and the area around the shipyard ought to be bustling. Instead, many restaurants and supermarkets are shuttered. Only a few pedestrians mill about. "The population around here has clearly dropped," grumbles the owner of a sundries store.

Welcome to Jingjiang, Jiangsu Province, a city on the Yangtze River Delta.

New Century Shipbuilding employees in blue overalls enter the production site, but they are few and far between. The pounding of sheet steel makes a racket, but cranes on the docks stand idle. The private company once had 3,000 employees; its workforce has thinned.

Race for orders

The global shipbuilding industry is seriously imbalanced. Worldwide supply capacity comes to 100 million gross tons -- double actual demand. Companies sprouted up in the 2000s, only to run aground after the global financial crisis exploded in 2008. Chinese capacity accounts for a lot of the industry's fat.

Overall orders in China have picked up lately. In the four months through April, they amounted to 30.3 million tons of dead weight tonnage, up 160% on the year, according to the China Association of the National Shipbuilding Industry.

In April and May, New Century snagged three-ship and four-ship orders from overseas clients.

While it may seem like the market is turning around, though, the increased activity may in fact reflect the intense pressure New Century and its peers are under to drum up business. With the government bent on trimming some of that fat, shipbuilders need to give authorities a detailed rundown of their dealings by the end of the month.

The Ministry of Industry and Information Technology demands shipbuilders hand in reports on a wide range of factors: current orders, the state of their production facilities, research-and-development efforts, quality-control mechanisms and environmental protection measures. This information is stacked up against government-set criteria.

Exam pressure

Companies that make the grade earn a place on the ministry's new "white list." Basically, this is a list of players deemed worthy of staying in business.

What happens to those who fail the test? "They can't obtain bank loans and will become a target for selection and restructuring," a source close to the industry said.

In a sense, this system levels the playing field. The government creates the guidelines, leaving companies -- both state-run and private -- free to do business as long as they pass muster. In the past, the authorities might simply zero in on companies with excessive capacity and take steps to push them out of the market.

It remains to be seen whether the system will work as advertised. An industry insider said companies will be evaluated based on order backlogs, fresh orders and recent output. To survive, shipbuilders must soak up as many orders as they can before the deadline. The high stakes, some say, might spur reports of fake orders.

Local officials, meanwhile, will be responsible for examining whether the shipbuilders they oversee meet the standards. This could create a conflict between the central government's goals -- streamlining and increasing competitiveness -- and municipalities' desire to minimize local economic damage. There could be a temptation to slide even unqualified companies onto the white list.